SUCCESS OF YEMEN'S FIRST MINE DEPENDENT ON

UNCLAS SECTION 01 OF 02 SANAA 000348 SENSITIVE SIPDIS DEPT FOR NEA/ARP ANDREW MACDONALD DEPT OF TREASURY FOR SAMANTHA VINOGRAD DEPT PASS TO USTR FOR JASON BUNTIN DEPT OF COMMERCE FOR TYLER HOFFMAN E.O. 12958: N/A TAGS: ECON EIND ELAB EMIN ENRG BTIO YM SUBJECT: SUCCESS OF YEMEN'S FIRST MINE DEPENDENT ON SECURITY, HIGHER PRICES REF: 06 SANAA 2143 SUMMARY -------------- ¶1. (SBU) Yemen's first mine is expected to export zinc starting in mid-2010, contributing up to USD 160 million of non-oil revenues to the ROYG after the end of a three-year tax holiday. The UK-Yemeni joint venture, Jabal Salab, is hoping that the price of zinc returns to its 2008 peak so that the project will be profitable, since it would barely break even selling at current price levels. The mine is located in Marib, at the intersection of areas controlled by three competing tribal groups, and is reliant on Yemeni Republican Guardsmen and local tribes for site security, a markedly different security arrangement from that used by the oil companies also operating in Marib. End Summary. ZINC EXPORTS TO BEGIN IN 2010 -------------- ¶2. (U) Yemen's first mine, located 100-km northeast of Sanaa in Marib governorate, will begin processing zinc ore in mid-2010, according to ROYG and company officials. The mine, Jabal Salab Company, is a USD 200 million joint venture between UK ZincOx (52% share) and Yemeni Shaher Trading Company (48% share) and will process 800,000 tons of zinc ore into 80,000 tons of zinc concentrate annually. The mine could make Yemen one of the top twenty zinc producers worldwide and will generate USD 160 million in revenues for the ROYG annually, starting in 2013 when the company,s tax holiday ends, according to Jaber al-Sanabani, acting director of the International Finance Corporation (IFC) in Yemen. ¶3. (U) Yemen's mining sector is largely untapped and could eventually account for 3-7% of the country,s GDP, according to Sanabani. The IFC has been working with the Ministry of Oil and Minerals since 2006 on a mining policy reform project (reftel) that has streamlined the ROYG's production-sharing agreements with foreign companies to conform with regional best practices, paving the way for projects such as the Jabal Salab mine. Jabal Salab claims that the mine will provide Yemenis with 400 direct jobs and 1,400 indirect jobs, although some of the direct jobs likely will be cut as operations progress, according to Majed Abdul Haq, the company's deputy general manager. 
 MINING SUCCESS DEPENDENT ON HIGHER PRICES... -------------- ¶4. (U) Despite soaring rhetoric from Prime Minister Ali Mujawar about the future of the mining sector at a February 26 foundation-laying ceremony, the mine's success will largely depend on a significant rise in the global price of zinc. Base metal prices, like those of crude oil, declined dramatically in the past year, in large part due to reduced demand resulting from the global financial crisis. The Jabal Salab project was financed when zinc prices averaged USD 5,000 per ton. Current zinc prices rarely reach beyond USD 1,150 per ton, however, and the company must sell at USD 1,200 per ton just to break even, according to deputy general manager Abdul Haq. ...AND HAPPY TRIBESMEN -------------- ¶5. (SBU) As with its oil and gas reserves, Yemen's mineral resources are located in some of the country,s most troubled spots. The Jabal Salab mine is located near the Marib village of al-Fardah, at the intersection of areas governed by three powerful and often bellicose tribal groups, and zinc-laden trucks will have to travel the 230-km highway, past numerous tribal checkpoints to the western port of Hodeida. Other potential mining sites include tribe-dominated areas in Hajjah, Saada, Shabwa, and Jawf, according to Ismail al-Janad, head of the ROYG's Geological Survey and Mineral Resources Board. ¶6. (SBU) Opinions differ on the soundness of Jabal Salab's security model, which is markedly different from that of the international oil companies also operating in Marib. Whereas oil companies often employ Yemeni security firms to act as SANAA 00000348 002 OF 002 intermediaries with the tribes, Jabal Salab is dealing directly with the three major tribes in the area, including the powerful Showhayfi tribe, and relying on a Yemeni Republican Guard deployment for site protection. The success of any resource extraction project in Yemen depends on companies reaching some sort of accommodation with the local tribes -- usually jobs and SUV's in exchange for free passage and a pledge not to harm the project's infrastructure. ¶7. (SBU) Jabal Salab suffered numerous delays in 2007-2008, owing to increasingly brazen tribal demands for jobs, vehicles, and cash, according to Jean Phillip Roos, head of Griffin Security, a Yemeni firm that deals with Marib tribes on behalf of oil companies. The trigger-happy Republican Guards do not know Marib and will complicate, rather than facilitate, relations between the company and the tribes, Roos said. Others, including the governor of Marib, Naji al-Zayadi, and Jaber al-Sanabani, the acting IFC director, defended Jabal Salab's plan to deal with the tribes directly, saying that the mine is providing more local jobs and a greater share of revenues (NFI) to the tribes than the oil companies. COMMENT -------------- ¶8. (SBU) Prior to the establishment of Jabal Salab in 2007, Yemen's mining laws seemed to have been designed to repel foreign direct investment and the ROYG signed agreements with small firms with no previous mining experience. Against this historical background, the Jabal Salab mine should be seen as a major step forward and will make a significant contribution to the ROYG's non-oil revenues, although not until 2013. If the local tribes come to see themselves as stakeholders in the project rather than outsiders, and if global zinc prices return to higher levels, the mine could lead other major companies to develop Yemen's mining sector, further diversifying the ROYG's revenue stream. SECHE